Mid Term 1

Question 1

What are the three basic financial statements?

Answer 1

1. Balance sheet
2. The income statement
3. The statement of cash flows

Question 2

On a balance sheet, what is the equation of the three components that must balance?

Answer 2

Assets = Liabilities + Equity

Question 3

Which financial statement is based on a snapshot in time?

Answer 3

Balance Sheet

Question 4

What does EBITDA stand for?

Answer 4

Earning before Interest, tax, depreciation, and Amortization

Question 5

What is found on the left hand side of the balance sheet?

Answer 5

The assets of the business

Question 6

What is the market value of a company?

Answer 6

This is the valuation that is given to the equity in a business, not on the balance sheet, but based on on the number of shares outstanding multiplied by the price per share

Question 7

What does EBIT stand for?

Answer 7

Earning before Interest and Tax

Question 8

What is the book value of a company?

Answer 8

The value of the owner’s equity as it appears on the balance sheet

Question 9

What are retained earnings?

Answer 9

Earning that the company does not return to its owners, but instead reinvests in the business. They are added to the ‘Equity’ section of the balance sheet.

Question 10

At the bottom of the statement of cash flows is the cash at the end of the period being reported. Where does that cash go on the balance sheet?

Answer 10

The cash appears at the very top of the Assets, on the left had side of the balance sheet.

Question 11

What happens to the depreciation and amortization expenses from the income statement when they appear on the statement of cash flows?

Answer 11

They are added back to net income. These are non - cash charges, so no cash actually goes out the door, even though accrual accounting requires the firm to deduct these expenses from earnings on the income statement

Question 12

At the bottom of the income statement, net income is recorded. Where does that net income then appear on the balance sheet?

Answer 12

The net income is added to the equity section of the balance sheet

Question 13

What is found on the right hand side of a balance sheet

Answer 13

How the assets were funded:

1. Liabilities (Money raised by going into debt)
2. Equity (Money raised from the owners, including their initial contributions and any earnings that have been reinvested in the business)

Question 14

Which financial statements cover events over a period of time, usually either a quarter or a year

Answer 14

Income statement and Statement of cash flows

Question 15

What is the central feature of an income statement, which separates it from a statement of cash flow

Answer 15

The income statement is based on accrual accounting which attempts to even out the lumpiness of real world cash flows to gain an accurate view of the long - term earning power of a business

Question 16

What are depreciation and amortization

Answer 16

Depreciation is a non cash charge taken against income that is a measure of the slowing wearing out of a long - term assets. i.e. a car that costs 10k might be depreciated at 2k per year for 5 years

Amortization is the same principal applied to an intangible item such as a patent, which might expire in 20 years. The purchase price of the patent would be gradually written off over its lifespan.

Question 17

Why will the statement of cash flows show a company generating cash at a pace quite different from what is shown on the income statement

Answer 17

The statement of cash flows removes removes the effects of accrual accounting

Question 18

What are the 3 components of the statement of cash flows

Answer 18

1. Cash flows from operation
2. Investments ( cash that was invested into the business, principally capital expenditures)
3. Financing (changes to debt or equity)

Question 19

What is the starting point for the statement of cash flows i.e. what is the first number that appears

Answer 19

net income from the income statement